Why Are Banks Closing
I was reading an article on Newsweek’s online site titled Bank On More Failures. The writer was interviewing Lawrence J. White, a professor at New York University’s Stern School of Business on the subject.
White basically believes that hundreds of small banks are going to fail, not necessarily because of the real estate problems with crashing home values, but because they were making loans that people couldn’t repay. And some of that worry is going to kill banks because of the way they’ve handled commercial real estate, over-investing in areas where, suddenly, there’s an over-saturation of things such as strip malls.
Of course there’s more in the interview, and I hope you check it out, because it’s not all that much more. I tend to agree with his assessment for the most part. I do believe banks have loaned out a lot of money they shouldn’t have. I think a big part of it is also tied in with credit cards and credit limits to people who really should have had them. I mean, if you give someone a credit line equal to half their income, and that income isn’t $2 million a year, you’re probably going to have problems if that person starts having financial difficulties of their own.
Those factors, plus the reality that banks actually speculate with your money in the stock market, which also took a major hit, and of course real estate, all contribute to the problems these banks are having. Most of the banks on the potential chopping block are small, but that’s because the large banks got bailouts that the smaller banks didn’t get.
The FDIC seems to feel it has enough money to cover most of the closures to come. That’s a good thing, because the last thing we need is another major hit to the deficit. I still don’t think we’re going to see that 1,000 number that some economists are throwing around; I hope I’m correct on that one.